If you have several outstanding debts, things may feel hopeless. Many people may avoid dealing with debt because they feel anxiety and confusion about how to go about paying off debt. Unfortunately, not dealing with debt head-on can lead to even more debt, which eventually can lead to bankruptcy. Fortunately, there are methods for paying off debt!
How to Use the Debt Avalanche Method
The debt avalanche method involves organizing your debts and figuring out which debt charges the highest interest rate. Beginning with the highest-interest debt, you pay more than the minimum payment - which is needed to cover the interest - and begin paying down the principal (dollar amount you borrowed). By paying more than the amount to cover the interest payment, you will eventually repay this debt. Once that debt is repaid, you can contribute that same monthly payment toward the debt with the next highest interest rate.
Debt Avalanche Method Spreadsheet
To begin, you need a spreadsheet to organize your debts and sort them by interest rate. Online, there are plenty of downloadable spreadsheets for the avalanche method. The spreadsheet will help reveal how much you have to pay each month to cover the interest on all debts. Any additional amount you can afford to spend will then be contributed toward the debt with the highest interest rate. By using a spreadsheet to keep things organized, you will feel more confident and be more successful at paying down the debt that is charging you the most interest.
Debt Avalanche Method Calculator
In addition to the spreadsheet, you should use a debt avalanche calculator to figure out which debt has the highest interest rate. The calculator will also help determine how long it will take to pay off the debt at various monthly repayment amounts. If you can afford to contribute $20 more per month, how many months of repayment will be shaved off? Paying as much as you can afford is important, because each additional month of repayment means paying interest on the outstanding principal. Paying the debt off sooner saves you money!
Debt Avalanche Worksheets
If you want to be hands-on and use a printed worksheet rather than a spreadsheet, there are printable PDFs available. On the other hand, if you want your worksheet to be available from anywhere, you can make a copy of available debt avalanche Google Sheets and save them in your Google Drive. A Google Sheet can be useful if there are multiple people who are helping to pay off debt, such as members of a household. The debt avalanche Google Sheet can be shared to all contributors, who can update it with their own monthly contribution amounts.
Advantages of the Debt Avalanche Repayment Method
The key advantage of the debt avalanche repayment method is that it saves money in the long run by focusing on the debts with the highest interest rates first. By going after the highest interest debt first, the total debts are also repaid faster. Going after higher interest debts first is important because of compound interest, where you pay interest on the interest that has already added to the debt! Focusing on debts with lower interest rates can increase the risk of compound interest increasing the debt on higher interest loans.
Disadvantages of the Debt Avalanche Method
It takes a lot of fiscal discipline to use the debt avalanche method! Because you are attacking the debt with the highest interest rate first, your monthly payment will likely be considerable. This means that you should have decent income some savings in the back to handle any emergency expenses. It may also take a long time to pay off the first debt, which can sap your confidence. Sometimes, people give up on the debt avalanche method and go back to making only the minimum monthly payments on all their debts.
Alternatives to the Debt Avalanche Method
The other popular debt repayment method is the debt snowball method. This method involves paying off debts in order of smallest balance to largest balance rather than highest interest rate to lowest interest rate. This method is popular because it helps debtors experience quick victories in paying off some debts, which boosts confidence. Just like the debt avalanche method, the debt snowball method has you allocate the monthly contribution from the debt you just paid off to the next debt on the list.
Debt Avalanche vs Snowball Calculator
If you are unsure which method is right for you, online calculators exist so that you can experiment with either option. By plugging in your debts and their respective balances and interest rates, you can see which method will let you repay debts faster (in chosen order) and with less total money. The calculators let you plug in your available monthly repayment contribution based on your budget.
Consolidate Credit Card Debts
Choosing between the two debt repayment options may be difficult, but there is a third option: consolidation. This involves taking out one larger loan to cover all smaller debts, and then simply making one monthly payment on the larger loan. Of course, this option is only beneficial if the single loan has an interest rate that is comparable - and preferably lower - than your existing credit card debts. This method is often only viable if you have good credit (a credit score of 700 or higher) and are eligible for a lower-interest loan or credit card.